5 Monthly Dividend Stocks that Beat the QYLD

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The Nasdaq Covered Call ETF, QYLD, is the most popular monthly dividend stock but is it actually destroying investor value?

Hey Bowtie Nation, Joseph Hogue here and a video that will undeniably piss off a lot of people, five monthly dividend stocks that beat the QYLD, five stocks better than the Nasdaq 100 Covered Call ETF. It’s an extremely popular fund, pays a too-good-to-be-true 11.8% dividend yield and you know what…it is just a little too good to be true!

Chart of Nasdaq 100 Covered Call ETF, QYLD, and high dividend yield on monthly dividend stock
Chart of Nasdaq 100 Covered Call ETF, QYLD, and high dividend yield on monthly dividend stock

But it is easy to see why the fund is so popular. It pays one of the highest dividend yields out there, put $10,000 in the fund and it’s going to put nearly $1,200 in your pocket every year. You’ll also see those checks hit your account every single month which is hugely motivating, watching that cash flow like you’re some kind of Tik Tok star.

Now it’s not that the QYLD is a bad fund but it is losing your money compared to the monthly dividend stocks I’m going to show you. In fact, the QYLD returned just 8% a year over the last five years…yes even with that 12% dividend, it only returned 8% because the share price dropped so much and it’s hugely underperformed the stocks it holds . In this video, I’ll reveal five dividend stocks with an average return of 15.5% a year, almost double the QYLD, all with strong dividend yields and paying them out every single month. I’ll also explain why the QYLD strategy isn’t working, the hidden risks in the fund and the ONLY type of investor that should be investing in it!


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How does the Nasdaq Covered Call ETF Work for Monthly Dividends?

Let’s start with a quick explainer on how the QYLD fund works and then I’ll show you how the five monthly dividend stocks beat it.

The fund uses a covered call strategy on the Nasdaq 100 index, that’s the 100 largest companies in the tech-heavy Nasdaq. So what it’s doing here is it’s buying the 100 stocks in this index, mostly large technology companies, and then it’s selling call options against them.

How does the Nasdaq Covered Call ETF QYLD Work?
How does the Nasdaq Covered Call ETF QYLD Work?

Call options give an investor the right to buy a stock at a certain price up to a set date and for that right, they pay the other investor a premium up-front. For example, if I owned shares of Tesla but were worried it might come down from the current $800 share price…or if I just wanted to create a cash flow from this non-dividend paying stock, I could sell a call option to another investor.

Looking at the stocks in the fund, it’s a who’s who of big tech companies with more than half a billion dollars in shares of Apple alone along with Amazon and Microsoft but if you scroll down, you see not all these are tech stocks. You’ve got some shares of Comcast and Pepsi as well because they’re in that Nasdaq 100 index.

Now what you don’t see here though you can see all the fund holdings on its website, is the covered call strategy, so what is it selling to offset some of the risk and generate cash.

We see this going to the fund website and clicking to download all holdings. Here we see all 102 stocks held in the fund and the market value, all the way from $847 million in shares of Apple to $7.8 million in shares of Constellation Energy for a total fund assets of just over $6.8 billion.

And it’s here in this last line that we see the covered call strategy. The fund has sold calls against the Nasdaq index expiring in a month for a market value of $222 million which is about 3.3% of the total fund assets.

Risks of the Covered Call Strategy for Dividend Stocks

There are a few things that are important there to help you understand the strategy and where the risks are, and why the fund might underperform others.

First, the fund is selling calls against about 3% of its stocks each month, just enough to produce the cash needed to pay out that 12% annualized dividend yield. The cost of selling those calls every month is going to be a drag on the performance, though it’s fairly small. Also though, just using that covered call strategy, means if the stocks in the Nasdaq jump higher in one month…the fund is going to miss out on some of that because it’s sold another investor the right to buy those shares for cheaper. That’s why you saw the QYLD underperform the Nasdaq tech stocks by so much over the last five years.

Another weakness though is that because the QYLD is a fund of over 100 stocks, it loses the opportunity to run higher if any of those stocks does really well. The non-tech stocks like Constellation Energy and Ross Discount Stores tends to slow the growth and the returns versus the stocks we’ll look at.

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Monthly Dividend Stocks Better than the QYLD

I’m excited to get to our list of monthly dividend stocks so I’ll show you later why the QYLD underperforms and the one type of investor that might still choose it over these.

We’re going to be counting up to the highest total return dividend stock and first on our list is Main Street Capital, ticker MAIN, with its 6% yield and 9.2% annual return.

Now before you click out or leave one of your comments, something like you need that 12% dividend yield to pay your mac and cheese addiction and 6% isn’t going to cut it. I’ll show you later what most investors get wrong about yield versus returns and how to create higher dividends from your stocks.

Main Street is a business development corporation, specializing in loans and equity investment into mid-sized businesses, with shares producing an 9.2% annual return over the last five years. The company has regularly increased its dividend, now at $0.205 per share along with special dividends of over $4 per share distributed since 2013.

Main Street has 182 portfolio investments as of the most recent quarter with the largest representing just 3% of total fair value so a hit to any of these investments isn’t going to hurt the shares much.

One thing you always want to watch for with BDC stocks is to compare the effective yield on the company’s investments with the dividend yield. In this case, Main Street earns a weighted average yield of 9.7% on its loan investments and pays out 6% in monthly dividends. The average yield above the committed dividend yield is a must for dividend sustainability.

Gladstone Capital, ticker GLAD, pays a 7.2% dividend yield and has rewarded investors with an 11.7% annual return over five years.

And normally I wouldn’t load a portfolio up with so many business development corporations, instead trying to diversify it with more mREITs, real estate and other dividend stocks but this chart shows an interesting idea for the group. This is the average portfolio yield for Gladstone since 2012 and notice rates were much higher before 2019. The average yield on loans was over 11.6% in the five years through 2019 versus just 10.5% this year.

As interest rates rise over the next couple of years, you’ll see that average portfolio yield rise as well. As long as the economy doesn’t fall apart and loan defaults don’t jump, these BDCs are primed to book higher cash flow and pay out higher yields to investors.

But if you are over-exposing a portfolio to one type of company, especially BDCs, then you want to pay special attention to each company’s sources of capital and business. For example, every BDC will show you the industries in which it loans and the type of loans it’s making. You see here that Gladstone is well diversified across 17 industries so a major event in any one group isn’t going to materially affect the company.

The Big Problem with the Nasdaq Covered Call ETF QYLD

We’ve still got three more of those monthly dividend stocks to reveal along with how to boost the dividend yield on all five of these stocks but I see some itching fingers out there heading to the comments so I want to address the big question I know you’re asking.

You’re asking yourself, but if the plan is to hold the QYLD forever and just keep collecting that dividend…what does it matter if the share price falls? I’m not selling so I’ll never care.”

Nation, you know I love the buy-and-hold strategy but you’ve also got to ask yourself…how many stocks do you own right now that you’ve held for more than maybe a year or two? In fact, data from the New York Stock Exchange shows the average holding period for a stock is now just 5.5 months.

Even if you truly intend to hold the QYLD forever and resist the urge to sell, a lot of life happens in thirty or forty years. Expenses come up and even that 12% annual dividend isn’t going to be enough for most people to live on in retirement. Even on a $100,000 portfolio, that 12% dividend yield is only a thousand dollars a month. You’re going to need to sell the shares and when you do, it’s going to suck if you have to sell them for less than you paid.

In fact, that’s why there’s really only one type of investor that should be putting their money in the QYLD, a fraction of the investors out there that can confidently say they’re going to hold the shares and not worry about that falling stock price…if you’re already well into retirement and know that the dividend income from the QYLD is all you’ll ever need without selling the shares, only then if you are 99% certain your investments will outlive you, then I’d say the higher yield on the QYLD is better than the higher total return on these stocks.

Say you’re still not convinced though. You’re committed to holding the stock forever and that price doesn’t matter…but it does.

That’s because the falling stock price may also mean a falling dividend payment. The current dividend yield may be almost 12% but that doesn’t help you if you bought in December 2017 at $25 a share. The most recent dividend in February was only $0.20 per share or $2.42 on an annual basis and it’s been as low as $0.17 a share in 2019. That would be a dividend yield of just 8.2% for investors buying at that $25 share price.

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Horizon Technology Finance, ticker HRZN, is a unique case in BDCs along with its 7.7% dividend and 17.5% annual return.

Horizon makes secured loans to venture and private-equity backed companies in the life sciences and technology industries…so you get that strong cash flow on the loans but also longer-term growth from the equity investment.

The portfolio of loans is well diversified by sector, geography and company stage. All these are going to be those fast-growing startups backed by venture capital and again, a great niche in healthcare and technology.

So besides that high yield you get from the typical business development corporation, here you get a little bit of growth stock as well.

The average yield on portfolio debt is 16.3%, well above the 7% dividend yield, in fact I think the biggest yield spread I’ve seen in a BDC stock. That keeps the dividend safe and will mean the stock price should continue to rise.

Next on our monthly dividends list is a fan favorite, Gladstone Investment Corporation, ticker GAIN, for a 6% yield and 19.7% annual return over the last five years.

And why I like GAIN here is because it takes a higher equity share than most other BDCs. Remember, those business development corporations are mostly making loans so the upside is capped at the interest rate. But Gladstone’s target investment is 25% equity and 75% debt versus a traditional BDC that will look for less than 10% equity in the companies it works with. That higher equity ownership might mean higher risk but it’s also going to mean higher returns on these investments.

And we see that in GAIN’s history of return on equity which is well above the industry average. The five-year average ROE of 17% is over three-times the median ROE for the BDC group and even though near-term return has come down, it’s still well above the average for the group.

Gladstone’s current portfolio is spread across 28 companies in 14 industries so a level of diversification there that should help it continue those returns even in a sluggish economy. The shares have done so well in fact that it’s been able to pay out multiple special dividends, boosting that cash return.

How to Create a Monthly Dividend Check

I’ve got one more monthly dividend stock to reveal, one with a yield of almost 7% and a 20% annualized return over the last five years but I know some of you are still saying, I need that higher dividend payment!

So I want to show you how to create a higher dividend from any of these five stocks, how to get that higher cash payment plus the return.

Sell Stock!

Now hear me out, because I know that’s like blasphemy for us investors.

What most investors don’t realize though is you are still better off selling shares on a higher-return stock than collecting the high dividend on a stock that loses value.

Look at two portfolios, each only has one stock. One portfolio, in blue here invested $10,000 in shares of QYLD five years ago for $23.46 per share. Over the five years, the investor collects about $2.43 per share in dividends each year or just over $1,036 and a 10.3% dividend yield. Since the stock has fallen to $20 a share though, the portfolio is only worth $8,546 right now.

Comparing Monthly Dividend Stocks QYLD and GAIN Side-by-Side
Comparing Monthly Dividend Stocks QYLD and GAIN Side-by-Side

The other investor bought shares of Gladstone Investment, ticker GAIN, for $9.68 per share…same $10,000 starting portfolio. Since the stock only pays a 6% dividend, each year the investor had to sell some shares to make up the difference and collect a total of $1,100 to pay the loan on their Instant Pot they bought in 2017.

Even having to sell shares every year though, selling a total of 183 shares over the five years, that investor would still have 850 shares of GAIN. With the shares now at $14.93 each, the portfolio would now be worth $12,690…more than $4,000 than the QYLD investor.

What about taxes? They would be the same. You pay your long-term capital gains rate in taxes on any dividends you collect each year. Hold a stock for more than a year and sell shares, yep same long-term capital gains rate.

Nation, do NOT buy into a stock or a fund that constantly underperforms or loses value just for a higher dividend yield. Watch that total return of stock price and dividend because you can always create your own dividend.

And the highest return of the group, at 19.8% annually over the last five years, the Sabine Royalty Trust, ticker SBR, with its 6.9% dividend yield.

Sabine has an oil and gas portfolio that covers over two million acres in Florida, Louisiana, Mississippi, New Mexico, Oklahoma and Texas. Reserves on the assets are estimated to produce for at least another eight to ten years and the parent company regularly explores for new assets.

This one is all about oil prices and even if the price of crude comes down from recent highs, stocks like Sabine are going to be cash machines so be looking at explorers and MLPs for that cash flow.

The Nasdaq Covered Call ETF, QYLD, may seem like a great dividend fund with its double-digit yield but look closer and it may be leaving you poorer than before. If you truly aren't able to hold the QYLD forever then you could end up losing money on the shares. Look for high-yield dividend stocks that can also grow their share prices to get the best of both worlds!

Check out the rest of the High-Yield Dividend ETFs Series!

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